Housing Vacancies, Thin Markets, and Idiosyncratic Tastes
This paper presents a model with rental housing vacancies in equilibrium. Because of the indivisibility and multi-dimensional heterogeneity of housing units, the market is thin. As a result, a typical household entering the market is willing to pay a premium of its most-preferred over its second most-preferred available (vacant) unit. This confers monopoly power on landlords, which they exploit by setting rents above costs. Free entry and exit force profits to zero, with vacancies as the equilibrating mechanism. Thin markets are modelled by assuming an idiosyncratic component to household's tastes over housing units. The model is extended to treat costly search.
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